Soup Nuts: 6 Questions to Ask Before Buying Campbell Soup

By

Jack Hough

Nov. 22, 2017 12:47 p.m. ET

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Mushrooms aren’t the only thing getting creamed at Campbell Soup (CPB). The stock is down 24% this year, including an 8% spill Tuesday on an earnings and revenue miss. That compares with a 16% rise for the Standard & Poor’s 500 index.

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Bargain hunters could consider carefully before investing. On the one hand, Campbell now trades at a 15% discount to the S&P 500 relative to forward earnings estimates, versus an 11% premium, on average, over the past three years. On the other, with profits expected to decline in the company’s current fiscal year through July 2018, and shares in freefall, Campbell looks less like a defensive seller of staples than a structurally challenged supplier of packaged foods amid a consumer shift toward fresh foods and a price war among grocers.

Here are six questions potential investors should consider, courtesy of J.P. Morgan analyst Ken Goldman, who has a Neutral rating on shares.

1. “Will the company get its promotions back with a key customer?” An unnamed customer has been playing hardball. Credit Suissesays it’sWal-Mart (WMT), and it’s holding out for lower pricing on condensed soups.

2. “If so, to what degree could it help fiscal 2018?” Not much, according to Goldman. Once a deal is reached it could take weeks to return to normal promotional levels.

3. “Might this customer inflict further damage on the canned soup category down the road?” Wal-Mart--or, um, the unnamed customer, very well could inflict more damage by, for example, cutting back on canned soup and selling more refrigerated soup. Campbell sells both, but refrigerated soups have lower margins.

4. and 5. “Why does management have confidence that further carrot issues will not crop up? Why is Campbell Soup still selling carrots at all?” Campbell bulked up on commodity carrots when it bought Bolthouse Farms five years ago. This year, bad weather has cut into crop yields and Campbell profits. The company’s latest earnings call contained 30 mentions of the word “carrot”--mmm, mmm, not good.

6. “Is annual EPS guidance still too high?” Yes, earnings will miss the low end of company guidance by four cents a share, predicts Goldman. So far this year, the fiscal 2018 earnings consensus has fallen by 25 cents a share, to $2.98.

Stocks are falling this morning as Facebook drags down the Nasdaq. Newell brands gets a lift from Carl Icahn's success, while reports Apple will build its own screens takes down shares of screen makers.

The Dow Jones Industrial Average finished up 72 points today, and the S&P 500 broke its four-day losing streak but some strategists contend it's time to get defensive. We also look ahead to Nike's earnings, and consider whether electric vehicles will help spur the next commodity boom.

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